Commentary on commercial issues relating to climate change

Investors Wake up to Indonesia’s Renewable Energy Opportunity

Indonesia is making great strides in its efforts to expand investment in renewable energy, with international companies now responding to the regulatory and tariff incentives that have been put in place over the last year. Foreign Direct Investment in particular is being targeted.

Indonesia is the largest economy in ASEAN, has recently been upgraded to investment grade by the Japan Credit Rating agency, has only a 65% electrification penetration rate, rapid energy demand growth, a rapidly expanding economy, and has introduced attractive incentives for Independent Power Producers (IPPs). With enormous geothermal and hydropower resources, Australian companies are starting to get involved.

Reversal of fortune

Giles Parkinson

Australian geothermal companies are making a beeline for Indonesia and other countries on the Pacific Rim, lured by reduced technology risk and the sort of incentives they could only dream of in their own country.

Australian companies such as Panax Geothermal, Greenearth Energy and Origin Energy have signed joint ventures in Indonesia to take advantage of that country’s determination to become the world leader in geothermal energy production.

For the smaller companies in particular, it’s an opportunity to develop an operating asset, generate much needed cash flow and hopefully enjoy a market re-rating that will make it easier to raise funds for their Australian projects, which have been all but impossible.

Which is kind of ironic, given that most market mechanisms are designed to encourage cash-rich investors from developed nations to invest in developing countries. Here, it is the Indonesian government that is providing the opportunity for Australian companies to become rich enough to invest in their own country.

The Indonesian government has announced plans to increase its current capacity of geothermal energy nearly three-fold in the next four years, and to more than 9,500MW by 2025. It is offering attractive tariffs – the US government has provided $US1 billion in credits to local banks to fund geothermal developments, and a host of companies from Europe, Asia, north America and Australia are competing for tenders.

Panax Geothermal appears to be the most active Australian company in Indonesia and has two projects in partnership with PT Bakrie Power it wants to bring on line within the next two years.

The first is a 30MW facility planned on the island of Flores, which will attract a tariff of $US125 per megawatt hour. This is significantly cheaper than the diesel that currently powers the island, and should deliver good returns for the developers. Geothermal resources in Indonesia are conventional volcanic resources, hotter and shallower than those in Australia, and easier and cheaper to exploit.

Panax has signed another deal with Bakrie to construct a 25MW facility for a lead/zinc mine in Sumatra, which will attract a tariff of $US150/MWh for the first eight years and $US125/MWh thereafter.

Interestingly, Australian energy giant Origin Energy has teamed up with Indian industrial giant Tata – a fellow investor in Australian geothermal play Geodynamics – and secured the Sorik Marapi geothermal concession in northern Sumatra, which it says has the potential of 200-300MW of geothermal generation capacity.

Origin expects to begin construction of the installation in 2012, well before any of its Australian geothermal plays come into production, and a spokesperson said the tariffs for the plant would be up to $US97/MWh. Origin and Tata are looking for other geothermal opportunities in the country.

Panax CEO Bertus de Graaf says he also hopes to bring his project into production within two years. “Australia is suffering from uncertainty from renewable energy policies, and the risks (in Australia) are higher than they are in Indonesia,” he says.

De Graaf expects the delivery of production assets will lead to a re-rating by investors. Like other geothermal companies in Australia, Panax shares have slumped sharply in recent months.

“Once they understand that we have less risk and access to a good tariffs, that will lead to a revaluation of the company. The projects will generate cash flows but the revaluation itself would make it easier to raise money.”

Greenearth Energy CEO Mark Miller, whose company is looking at a couple of project opportunities with a local partner, says Indonesia offers lower technical risk, hotter and shallower resources, substantial demand and a pretty good grid infrastructure.

“While there are great prospects here in Australia in terms of resources, the industry is still in its infancy. In Indonesia it is well established and well understood.”

Others are looking further afield. Kuth Energy, unable to get government or private financing for its geothermal plays in Tasmania, is looking to develop a shallow, hot volcanic resource in Vanuatu, and plans to begin drilling next year.

Hot Rock Ltd is looking at Chile, Green Rock is investigating opportunities in Hungary, while Petratherm has signed an agreement to pursue geothermal opportunities in Spain and the Canary Islands with Italy’s Enel Gren Power, has a district heating projet in Madrid and is looking at other possibilities in Barcelona.